Investment Flashcards
Dow Jones
Consist of 30 industrial stocks, 20 transportation stocks, and 15 ultitlity stocks. The DJIA is the 30 industrial stocks. It is most widely quoted but narrowest measure of the market.
It is price -weighted average
S&P 500
This is a float weighted index that includes the largest issues that trade in the NYSE and a few OTC issues. It is a broader measure of NUSE activity
Russell 2000
This is a popular capitalization weighted index of stock price performance of smallest 200 stocks in the Russell 3000 index
Wiltshire 5000
Broadest measure of activity and movement of the overall stock market. This value weighted index consist of over 7000 issues that trade on NSYE, AMEX, and OTC
Value line
Equally weighted index consisting 1700 selected issues that are on the NSYE, AMEX and OTC market
NASDAQ
Broadest measure of OTC trading. This is capitalization weighted index includes all the issues that trade in the NASDAQ ststem
Europe, Australasia and Far east (EAFE)
Typically compare to S&P 500 index to show relative performance of the U.S and international Equity markets
Black-shield option valuation model
Value non-dividend paying stock:
- price of the underlaying stock
- excercise price of the option
-time remaining to the expectation of the option
- interest rate
-volatility of the underlying stock
Note: increase in the excercise price of a call decrease the call’s value ( indirect relationship )
A increase in the excercise price of a put increase the put’s value (a direct relationship)
All other variables have a direct relationship for calls or puts
Coefficient of variation (CV)
CV measures relative variability to compare investments with widely varying rates of return and standard deviations : S.D./average(mean)
Standard deviation vs Beta
beta coefficient
Standardized mutual fund for risk.
Divide a specific fund’s realized return by its beta coefficient.
(SML and Jensen/alpha)
Time-weighted mean vs dollar-weighed mean
Time weighted mean: compare manager’s performance. Factors percentage.
Dollar-weighted mean: compare absolute dollar amount with financial goals. Factor cash flow.
Geometric mean calculation
IRR( dollar weighted calculation)
If pays no interest, no reinvestment risk; such as EEand Strips
Duration
Weighted average maturity of the bond’s cash flow on a present value basis.
High coupon=low duration (inversely related)
Long maturity= high duration (positively or directly related)
Short duration = high risk
Yield curve
Compares yield of similar bonds but with different maturities.
The curve show the market rates of interest for bonds of different maturities with the same credit ratings.
The goal of immunization is to protect the bond portfolio from interest rate fluctuations and reinvest rate risk by purchasing bonds with different maturities
Using duration to manage bond
- UPS(interest to up_ shorten duration)
-FAL (interest to fall_ lengthen duration)
TIPS
Issued in minimum denominations of $10000.
Interest are fixed.
interest payments vary as principal is adjusted for inflation and deputation.
In any year when the principal value of bond increases due to the inflation adjustment , the gain is reportable tax (phantom income )
EE bond after 2005
Non marketable, non transfer table, nonnegotiable, cannot be pledged for collateral.
Issued at face value, fixed interest rate.
Interest accrued monthly, compounded semiannually
Must be held for 1+
I bond
Inflation indexed accrual securities. Unlike EE, it has no guaranteed securities.
NOI does not factor in debt service cost. Can depreciate it
Liquid securities
Short term CD, laddered CD, life insurance cash values.
DDM
Market lowers the required rate of return for stock, the value of common stock will rise
Higher Required rate of return or lower dividend— value common stock decrease
If investor expect that growth in dividend will be higher as a result of favorable development of the firm, the value of common stock will rise
